Are you considering a pension transfer from your Defined Benefit Pension? If so, you’re likely aware of the complexities involved in such a decision, especially with the rules surrounding pension transfers in the UK. It’s important to consult a pension transfer specialist or seek defined benefit pension transfer advice to ensure you’re making the best choice for your financial future. In this blog post, we’ll explain what a Defined Benefit Pension is, when it might be a good idea to proceed with a defined benefit pension transfer, and how to go about getting the expert advice you need.
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DB Transfers
A Defined Benefit (DB) pension, which is also known as a Final Salary Pension Scheme is a rare type of workplace pension scheme that provides you with a guaranteed pension income for life and this income is based on your final salary or your average salary during the time that you have been working for that employer. The actual pension income will be calculated based on a number of factors in addition to your salary, these factors include the number of years that you worked for that employer while you were a member in the DB pension scheme and the other factor is the pension scheme’s accrual rate. Learn more about Defined Benefit Pension Plans
Advantages of DB Pension Schemes
Generosity:
DB pension schemes are seen generous in comparison to DC (Defined Contribution) pension schemes, as you would need an above average DC pension pot to receive a similar pension income as what the DB scheme would provide.Guaranteed:
Another main advantage of the DB schemes is that the pension income is guaranteed for the rest of your life, providing the actual pension scheme has remained funded. So, there is no concern that the money would run out during your lifetime.Disadvantages of DB Pension Schemes
Inflexibility:
DB pension schemes are not known for their flexibility when it comes to pension income, as you will not be able to change the pension income that you receive based on your circumstances and you will not be able to take a lump sums, apart from your tax free lump sum.Legacy:
With DB pension schemes, if you were to die, your DB scheme could provide a spouse’s pension and on the death of your spouse the pension would die too, so you can not leave the rest of your pension pot as a legacy to your children for example.
Why would you transfer your DB Pension?
You can transfer your DB pension scheme into a DC scheme, so your DB pension provider will provide you with a cash equivalent of your DB pension pot in exchange of giving up the guarantees that come with the DB pension scheme.
Not all DB pension schemes are transferable, DB scheme that are unfunded public sector schemes such as Teacher’s pension and NHS pension schemes can not be transferred. However, funded private sector DB schemes and some funded public sector scheme can be transferred.
Advantages of transferring your DB pension schemes
√ Earlier Access:
potentially you can access your DB pension earlier if you transfer it out to a DC pension scheme.√ Flexibility:
DC pension schemes are a lot more flexible than DB pension scheme, specially after the Pension Freedom in 2015, as you can take as much or less income as you need, you can take a lump sums in addition to the tax free lump sum, however, subject to income tax.√ Legacy:
you will be able to leave whatever left of your DC pension pot to your beneficiaries, so the who pension will be used till the last penny.√ Performance:
If the stock market and the investment funds that you invested your DC pot into perform well, you could end with a lot more money.√ Protection:
if your previous employer became insolvent, it would not affect your pension.Disadvantages of transferring your DB pension schemes
>>Guarantees:
potentially you can access your DB pension earlier if you transfer it out to a DC pension scheme.>> Investment Risk:
your new DC pension pot would be subject to investment risk and the value of your pension pot could potentially fall in value significantly.>> One way:
once you transferred you DB scheme to a DC scheme, you can not change your mind and transfer it back, it is irrevocable.There is no right or wrong answer in terms of shall you transfer your DB pension or not, as it will be based on how you weigh up the advantages and disadvantages of the transfer and it will be based on your individual circumstances and financial objectives. If someone you know managed to transfer their DB pension scheme, it does not mean that transferring your DB pension is suitable for you and your circumstances. You need the expertise of the regulated financial adviser to guide you through your pension rights and provide you with a proper advice on which way would be the best for you.
The law states that if you want to transfer a DB pension scheme with a transfer value of £30,000 or more, you must seek a financial advice. The financial adviser will assess your personal and financial circumstances, and they will look at your retirement planning in general before advising you if giving up those valuable guarantees that are provided by the DB schemes is the right thing for you or not.
Not all financial adviser can provide advice on DB pension scheme transfers, they need to be a Pension Transfer Specialist (PTS) in order to provide this type of critical advice, and they need to hold the right PII (Professional Indemnity Insurance), so if the advice was not suitable, then you can be compensated.
